Netanyahu supports major defense budget increase

The struggle over the defense budget will be the most urgent issue on Minister of Finance designate Moshe Kahlon's agenda.

Prime Minister Benjamin Netanyahu supports a major increase in the 2016 defense budget, according to preliminary discussions in recent days at the Ministry of Finance as part of preparations for the proposed 2015-2016 budget. Netanyahu, who is still serving as acting Minister of Finance until a new government is sworn in, ordered the Ministry of Finance professional echelons to consider the budget consequences of increasing the defense budget beyond the NIS 55 billion allocated in the Ministry of Finance's planning for 2016.

It is already clear that the struggle over the defense budget will be the most urgent issue on Minister of Finance designate Moshe Kahlon's agenda. As far as the Ministry of Finance is concerned, a hike in the defense budget can only be at the expense of reduced budgets for civilian ministries. Netanyahu and then-Minister of Finance Yair Lapid reached a compromise at the last moment last year, in which the defense budget was put at NIS 57 billion (before spending contingent on revenue). NIS 4.3 billion was defined as a "box" - a one-time supplement beyond the spending ceiling, with the reason for this exceptional measure being the costs of Operation Protective Edge. The projected budget hole for 2016 is estimated at NIS 6-14 billion.

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The reason for the gap is different estimates presented last week to the Prime Minister by Ministry of Finance Budget Director Amir Levy and Accountant General Michal Abadi-Boiangiu. These estimates do not take into account the budget consequences of the coalition agreements, especially with the haredi (ultra-Orthodox) parties, which will cost the budget an estimated NIS 4-5 billion.

Even if the coalition agreements cost nothing, however, the Ministry of Finance will still trying to cut civilian spending if the defense budget is increased beyond NIS 55 million. The reason is the first fiscal rule that allows the Ministry of Finance to increase budget spending by only 2.7% a year. The Ministry of Finance can, of course, change this rule, but this will have a negative impact on Israel's fiscal responsibility and credit rating.

Raising the spending ceiling will also require an increase in state revenues, either by raising taxes or eliminating tax exemptions - measures that Netanyahu and Kahlon are ruling out completely - or raising the current 2.75% budget deficit target, which would entail a change in the second fiscal rule. For this reason, it appears that the Ministry of Finance will again take the easy way out of cutting various ministry budgets, even though these are already considered among the lowest in the Western world in comparison with GDP. In its 2014 annual report (published just before Passover this year), the Bank of Israel became the most recent of a number of economic entities to warn that government civilian spending in Israel had fallen to a very low level. Excluding interest payments, 2014 civilian spending dipped 0.3% to 30.8% of GDP.

The corresponding average ratio for the Organization for Economic Cooperation and Development is 43.2%. On the other hand, Israel's defense spending grew 6.9% in 2014, its biggest increase since 2006. Incidentally, the Ministry of Defense has benefited in recent months from a higher budget, because the temporary state budget is based on the final 2014 state budget after the latter was increased by NIS 9 billion, NIS 7 billion of which consisted of reimbursement for the cost of Operation Protective Edge. NIS 2 billion of the amount received by the Ministry of Defense came from a permanent across-the-board cut in the civilian ministries' budgets.